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Our Guest today is Charlotte berer
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founder of the institute for private
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investors and author of the book wealth
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management unwrapped uh Charlotte thanks
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so much for joining us today I'm
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delighted to be here with you mle great
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so you say in the introduction to the
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book that it really grew out of your
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experiences creating an educational
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Community for investors and advisors can
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you tell us a little bit about how the
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book came about as a result of your
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experiences in creating this
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community it's so interesting when you
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think about Investors and advisors
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because so often they're put at
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loggerheads and they're each protecting
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and not wanting to be sold in the case
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of investors and in the case of advisors
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needing to sell something or be seen as
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very smart so I noticed that the
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dialogue wasn't quite as candid and open
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and addressing the real issues that
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needed to be
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addressed and so teaching private wealth
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management at important and also having
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the content at The Institute for private
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investor forums allowed me to try to
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break down that wall that existed
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between the two and improve the way they
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related right now is there a case to be
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made for
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whether uh investors need advisors in
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the first place uh or can can't wey
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investors just be the CEOs of what you
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call my wealth Inc uh and manage their
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own money they certainly can and part of
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what is in my book is a way for an
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investor to decide whether he's the CEO
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and can do it all but I use the analogy
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of a real CEO let's say as a CEO you
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have to buy a telecom system and youve
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do you go down and actually do the
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switches and routers yourself or do you
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know enough to delegate that and hire
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someone else who can put it in so I
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think that's the distinction and each
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investor knows their management style as
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a CEO they're going to either be very
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Hands-On or they'll be slightly less
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Hands-On more of a really smart
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delegator you also compare to renovating
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your
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kitchen right renovating your kitchen
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how many times I mean I feel this you go
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into Home Depot and you think okay what
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size what am I doing how could I
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renovate a kitchen as I walk into Home
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Depot I'd be overwhelmed on the other
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hand some people know exactly what
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they're buying and they're almost like
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contractors or Carpenters or very
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skilled
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Craftsmen they love being in Home Depot
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they know exactly what size Lumber and
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cabinets to get right uh going back to
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the question of uh advice versus a
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different approach whether or not a CEO
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or a wealthy investor is Hands-On uh
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there are people who believe that
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passive indexing uh a passive approach
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based on indexing is better than trying
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to second guess the market because you
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diversify your risk so much more uh by
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just spreading it out across the entire
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Market what do you think are the pros
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and cons of that approach well what I
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describe in the book is the danger of
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thinking that wealth management and
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being the CEO is just about investing
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and picking one strategy putting it on
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autopilot and going away I call that not
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delegating but
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abdicating so in terms of passive versus
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active I think most investment
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professionals would really agree that
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the key is asset
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allocation so even if you're all passive
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you still need to be aware of how you're
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allocating and life changes you may have
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one allocation at this age or in these
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circumstances and quite another later in
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your life and that's where an advisor
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can come in or not depending on how you
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see your own needs so let's say uh an
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investor decides not to abdicate but to
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delegate uh to an advisor what are some
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of the most important considerations in
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choosing an advisor and and especially
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how how do you avoid advisers who may be
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too salesy in their
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approach well it's hard because some of
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the best salese are very very appealing
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and compelling you want to work with
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them and yet you're being in an
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oldfashioned word you're being snowed
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and a lot of investors are lary of that
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so so the most important pieces I
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believe that I detail in my book are
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this you need to know what kind of
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investor you are first and foremost and
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then you really need to set out your
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needs and your outcomes what are you
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really looking to do with this wealth
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what's the purpose of it and then how
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are you going to judge whether you've
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hired the right advisor or not now all
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of these exercises are ones that you can
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and should do with an advisor and guess
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what more than one because in the
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interview process if you take your time
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and really hear more than just one
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wonderful salesman you'll begin to get
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very Discerning and can see who's really
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talking about risk and return in a way
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that not only you understand that's
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going to suit your own personal needs
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and goals right you recommend something
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called a five PS exercise tell us about
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that that's where investors can both
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learn but also be incredibly blindsided
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the five PS are in somewhat uh
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oversimplified the components of an
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investment or an advisory firm and
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that's the philosophy what they believe
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in their values the process how they
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make their decisions the performance
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which of course is their returns and
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then also the people and then lastly the
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fees spelled pH EES so if you take a pie
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of 100% And you a portion among those
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five and you overweight one that's going
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to be the place where you're most
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vulnerable to being too captivated so if
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people is everything you're going to
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pick a firm with people like you People
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Like Us syndrome I call it if you think
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it's performance and you put 50% on
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performance you're going to keep hiring
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and unfortunately keep firing firms who
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have hot hands that suddenly go cold MH
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so what's the best way to hedge your
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risk uh in in uh how you choose an
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adviser practice makes perfect interview
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four five have the same exact questions
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for each firm give them start them all
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on a Level Playing Field I think I
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shared one story where this one advisor
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came in and had this incredible track
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record beginning in March of 2009 to the
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week before the meeting with the
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Prospect and of course it looked great
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however the other three firms they were
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interviewing weren't giv the same chance
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to use that exact same
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timeline so that really can be very
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deceiving but having a system such as I
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suggest in my book and doing the exact
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same questions with each of the
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contenders is a much fairer beauty
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contest than saying we're going to have
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a beauty contest for apples and we're
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going to have apples bananas and pears
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all and bananas everybody can come into
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it but how are you going to make a
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decision great one of the most uh I
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would say interesting areas between
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advisers and investors the question of
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fees uh what are your thoughts on uh uh
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what's the right way for investors to
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know what the right level of fees uh
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should be paid for
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advice there are two things here that I
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think are really critical fees are first
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the explosion waiting to happen in our
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industry the more transparency comes to
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the four the more more investors are
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losing faith and trust in the industry
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because fees are kept hidden so that's
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number one but number two investors can
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ask are you being paid directly or
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indirectly for what you're suggesting I
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buy tell
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me that puts you as the investor
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immediately as a more informed
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questioner and lastly um we did a study
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with W knowledge at Wharton together
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where we showed that if you can show
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fees in
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context and that means here's our fee
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for you and here's how our competitors
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how they charge at different levels of
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wealth that chart if you ask for it from
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a potential advisor will not only show
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them that you're well informed but will
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also give you a wonderful context for
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realizing whether this is a fair fee
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because if you go for the cheapest
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provider that may look very alluring the
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problem is you may get what you pay for
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and be missing some other aspects of
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advice that you really are going to come
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to want and depend on you know I
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remember that thank you for bringing up
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that study that we had done that IPI and
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knowledge at Wharton had done together I
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think with State Street several years
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ago uh one of the very interesting
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aspects of that study I remember was
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that uh advisor thought that investors
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trusted them at this level was while
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investors actually trusted them at a
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much lower level uh what does that tell
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you about uh the value of trust uh
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especially in the aftermath of the
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financial crisis and how can the trust
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be established between investors and
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advisers trust is the glue that holds
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any investor advisor
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relationship and creates the partnership
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trust is the glue and it's a word people
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misuse
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and short change all the time I would
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say that the way to develop that trust
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is to create metrics for valuing the
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advice and create a report card so that
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you can say here's what we said we do
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here's what your goals are here's how
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we're doing versus your goals and that
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builds trust trust is not an instant
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earning trust is something that gets
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shown over time being predictable I can
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rely on this advisor but you know what
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it's a two-way street the advisors if
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they are professional as well they need
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to expect investors to be trustworthy to
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share the information that will help
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them do a better job for their family
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and so often it's both sides are being a
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little less than candid right so do you
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see trust primarily as a matter of of
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metrics or as a matter of communication
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or both it's definitely both it's
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Communications on a foundation of real
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metrics the classic error is that too
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many advisers will say in an
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interview oh we help you sleep better at
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night but what does that mean and the
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first time an investor hears that they
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go oh thank goodness I finally found an
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investor that an adviser that will help
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me sleep better at night I don't think
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so they begin to realize it's a cliche
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so how do you do that is the question so
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it's all about Communications and
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unfortunately the investment industry
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speaks a language of its very own that
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is merely a separator and I believe
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creates mistrust right you know one of
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the things I found very interesting
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about your book is that you identify
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these four major risks that can send uh
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an investment strategy off the cliff uh
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what what are those risks and how can
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investors guard against them well this
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was actually um the work of a man by the
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name of Jeff Davy from phom metrica in
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Australia and he said too often we look
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at risk it's just standard deviation or
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the required risk the one that we chart
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and that Wharton professors are always
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citing but there are three others that
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are equally important and one is risk
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tolerance which is more of a personality
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characteristic another is the perceived
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risk how does the investor see the world
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today are they panicked by last week's
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volatility for instance on the stock
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market and then so it's risk required
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risk risk tolerance perceived risk and
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then the um risk that they can take
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because of who they are how old they are
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what they can expect in the future so
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that's just the risk situation that
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they're in right know one of the people
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I I I uh you invest
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you quote in your book is someone who
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complained that when he asked his
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advisor about the time the adviser told
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him how to make a watch uh uh tell us
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how uh advisor should communicate with
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investors about risk and other issues
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without bombarding them with so much
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detail that they put them to sleep yeah
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well that's where I believe emotional IQ
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comes
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in and many many investment
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professionals have a dir of emotional or
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EQ they have a huge amount of IQ and so
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what smart advisers do is they try to
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figure out who in their firm can do the
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conversation or the dialogue that
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determines the personality of the
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investor sitting across the table and
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too often they just bring the entire
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dictionary and say here or the entire
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instruction manual and say here not
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realizing that each investor sitting
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across from them has a
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different hunger
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interest
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curiosity but one thing holds true
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across all investor types and that is
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show me the picture show me whether it's
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a mon Carlo simulation or a risk return
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chart that shows how much risk did you
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have to take to get that much return a
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simple chart a simple graphic is going
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to be compelling to any
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investor uh how should investors measure
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their advisor performance and when is
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the
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and and and when is the right time to
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know that it's time to let an adviser go
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okay well that's two big questions um
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how to measure your advisor and then how
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to know whether it's time to fire um
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well let me start with the last question
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um an investor came to me right after
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the crisis and said my adviser lost me
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so much money Charlotte I want to fire
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him right away and I need to hire
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somebody right away and can you give me
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three names and of course I said no I
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can't give you three names but I will
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give you a system for looking at how
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you're going to do this and I said the
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first and most important thing is
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include your current adviser whom you're
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about to
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fire in the competition for your assets
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going forward and guess what using a the
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system of questions that I gave him he
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ended up hiring the adviser he was about
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to fire because suddenly the adviser
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gave him a context for understanding the
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performance he'd had and he actually did
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better than most endowments most
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investors most pension plans and he
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hadn't realized that when you broke down
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the asset classes and how they performed
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versus a benchmark so all of those
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things came into play now you might ask
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why didn't he get given all of that by
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his advisor without having to ask well
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the evolution of our industry is such
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that the more investors and advisors
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talk the more advisers realize oh our
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clients really want this now back to
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your first question how should you
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measure your advisor that's something I
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believe you decide before you hire the
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adviser and before the adviser lets you
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hire them and you may think that's odd
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why am I saying let's the more discovery
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about
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expectations what is our outcome what is
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our risk Target what are returns are we
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looking for when do I want to get a call
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from you when do I want to get an email
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how often do I want to meet with you and
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then each and every meeting you're
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looking at the metrics that you set
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before you even hired it and it really
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starts with the investment policy
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statement and a statement of goals
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purpose of the money well let me ask you
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one last question uh let's assume that
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in this room with us right now we have
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one investor and one advisor what's the
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one piece of advice you would give to
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each of them about how to optimize their
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working
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relationship dare to say it
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[Laughter]
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and what I mean by that is the investor
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needs to dare say I don't understand
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what you're talking about or I'm not
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happy with the relationship manager I've
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been assigned might you think of someone
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different or I don't feel comfortable in
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this market and on the advisor side she
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or he needs to dare to say we're not
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always going to agree we're not always
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going to agree you say you want this
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report done this way but if you want my
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firm to remain profitable and in
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business we cannot customize every
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report for every client so they both
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need an extra dose of
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Courage Charlotte thanks so much for
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speaking with knowledge at whorton
00:17:45
you're very welcome
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[Music]
